US & NC Construction Spending, Labor & Materials Outlook

1. US & NC Construction Spending, Labor & Materials Outlook NC State Construction Conference Raleigh, March 28, 2019 Ken Simonson Chief Economist, AGC of America simonsonk@agc.org

2. Headline Forecast • The US economy is still expanding but more slowly: - consumer, business confidence are generally high; ‘19 recession probability is low - but latest data are weak for jobs, retail sales, single-family housing, manufacturing - trade & fiscal policy concerns continue • Contractors remain busy and confident; construction employment is growing in most states and spending is up in most project categories • Three concerns: - impact of trade policies on materials costs and on demand for construction - widening labor shortage, worsened by hostile immigration policy - if interest rates rise, may cut demand for income-producing projects, new homes Source: Author

3. AGC members’ expectations for 2019—US & NC 3 Source: AGC 2019 Outlook Survey, Jan. 2019

4. Construction spending & employment, 2006–2019 Employment, April ’06 (peak)–Jan. ‘19 millions, seasonally adjusted Spending put in place, Feb. ‘06 (prior peak)–Jan. ‘19 trillion $, seasonally adjusted annual rate 12/18 Total: $1.28 trillion (6.2% above ‘06 peak) 1/18 Total: 7.5 million (3% below peak) Nonresidential (0.6% above ‘18 peak) Private residential (25% below ‘06 peak) Residential (16% below ‘06 peak) Private nonresidential (1% below ‘18 peak) Public (4% below ‘09 peak) Source: spending--U.S. Census Bureau; employment--Bureau of Labor Statistics

5. Nonresidential spending by segment: 2017-2018 change and 2019 forecast Source: U.S. Census Bureau construction spending report; Author’s forecast

6. Construction spending: education, health careannual total, 2008–16; monthly (seasonally adjusted annual rate), 1/17–1/19; billion $ Education:(state/local K-12, S/L higher; private) Health care: (private hospital, S/L hospital, other) total (78% private) total (78% public) state/local preK-12 private hospital state/local higher ed Other private state/local hospital Jan. ‘18–Jan. ‘19: 7% (state/local preK-12 14%; state/local higher ed -2%; private 4%) Jan. ‘18–Jan. ‘19: -3% [private hospital -2%; S/L hospital -11%; other (special care, medical office, federal) -2%] • Source: U.S. Census Bureau construction spending report

7. Key points: education & health care • Rising house & commercial property values are supporting school district tax receipts & bond issues for preK-12 projects • Higher-ed enrollment is shrinking and some small colleges are closing; decrease in full-tuition foreign students will hurt budgets • Rising stock prices help private school & college capital campaigns • Health care spending is shifting from hospitals to standalone special-care facilities (urgent care, surgery, rehab, hospices) Source: Author

8. Construction spending: public worksannual total, 2008–16; monthly (seasonally adjusted annual rate), 1/17–1/19; billion $ Transportation facilities (air, transit, rail, water) Highways (99.7% public in 2018) total other air Jan. ‘17–Jan. '18: 13% Jan. ‘17–Jan. '18: 9% (air 16%; other 5%) Conservation and development (99.8% public in 2018) Sewage/waste & water (sewage 98% public in 2018; water 99% public in 2018) sewage/ waste water Jan. ‘17–Jan. '18: Sewage/waste 2%, water 5% Jan. ‘17–Jan. '18: 14% Source: U.S. Census Bureau construction spending report

9. Key points: roads, transportation, sewer/water • Federal infrastructure bill is unlikely in 2019; spending wouldn’t occur until later, but state highway funding and P3s are increasing • Many new and ongoing public & private airport projects; revival of freight rail construction; but no net increase likely in public funding for port, passenger rail or transit construction • Water & sewer/wastewater spending returning to 2011-15 levels after large drop in 2016-17; little long-term new funding likely • Conservation will grow if Corps of Engineers can award enough $ Source: Author

10. Construction spending: industrial, heavyannual total, 2008–16; monthly (seasonally adjusted annual rate), 1/17–1/19; billion $ Power (94% private in 2018) Manufacturing (99.4% private in 2018) total electric total other oil & gas chemical Jan. ‘18–Jan. ‘19: 2% (oil & gas 13%; electric -1%) Jan. ‘18–Jan. ‘19: 3% (chemical -3%; other 8%) Amusement & recreation (55% private in 2018) Communication (99.3% private in 2018) total private public Jan. ‘18–Jan. ‘19: -8% Jan. ‘18–Jan. ‘19: 9% (private 6%; public 14%) • Source: U.S. Census Bureau construction spending report

11. Key points: power & energy, mfg, amusement, communication • Solar, wind power are growing again; expect more oil & natural gas pipelines in ’19 but timing is subject to court & regulatory delays • Manufacturing construction should recover further in ‘19 based on energy projects, U.S. economic growth; but tariffs, foreign retaliation, rising construction costs are major concerns • Amusement & recreation spending is very “lumpy”—a few big stadiums at irregular intervals; but funding for local, state, federal parks keeps eroding • Communication may revive as wireless firms build out 5G networks Source: Author

12. Construction spending: developer-financedannual total, 2008–16; monthly (seasonally adjusted annual rate), 1/17–1/19; billion $ Retail (private) Office (87% private in 2018) Total Private Public Jan. ‘18–Jan. ‘19 : 8% (private 8%; public 10%) Jan. ‘18–Jan. ‘19:-14% Warehouse (private) Lodging (private) Jan. ‘18–Jan. ‘19: 11% Jan. ‘18–Jan. ‘19: 6% • Source: U.S. Census Bureau construction spending report

13. Key points: retail, warehouse, office, hotel, data centers • Retail now tied to mixed-use buildings & renovations, not standalone structures; ongoing store closings imply downturn continuing in ‘19 • Warehouse growth is still benefiting from e-commerce; more local than huge regional distribution centers likely in future; self-storage is booming • Office employment still rising but space per worker is shrinking; more urban & renovation work than suburban office parks • Hotel pipeline is still growing but sector is very interest-rate sensitive • Data centers remain a strong niche but no data available on how strong Source: Author

14. Private residential spending: slower single-family growth, pickup in multifamilyannual total, 2006–16; monthly (seasonally adjusted annual rate), 1/17–1/19; billion $ 12-month % change Spending put in place (billion $) Private residential total (25% below Feb ‘06 peak) 1/18–1/19: Single-family (44% below Feb ‘06 peak) Multifamily: 13% Improvements (16% below Apr ‘18 peak) Private total: -6% Single-family: -7% Multifamily (1% above Dec ‘18 peak) Improvements: -9% • Source: U.S. Census Bureau construction spending report

15. Residential spending forecast--2019: 5-9% (3% in 2018; 12% in 2017) • SF--2019: 6-10% (5% in 2018; 11% in 2017); rising interest rates, building costs, student debt will limit number of potential buyers • MF--2019: 2-5% (1% in 2018; -2% in 2017) • occupancy rates, rents have leveled off; but permits are rising, implying rebound in 2019 • millennials are staying longer in cities and denser suburbs where MF construction is bigger share of market than in outer suburbs • nearly all MF construction is rental, not condo; more high-rises • Improvements--2019: 5-10% (0% in 2018; 19% in 2017); rising number of seniors prefer remodeling to moving but interest cost, labor scarcity may be barriers Source: Author

16. Population change by state, July 2017–July 2018 (U.S.: 0.62%) decrease 0-0.49% 0.5-0.99% 1.0-1.49% 1.5%+ 1.5% 2.1% 0.9% 0.3% NH0.5% 0.8% 0.6% 1.1% 0.2% 0.4% -0.3% VT 0.3% 1.0% -0.2% 0.4% 2.1% 0.1% 0.4% MA0.6% 1.9% 0.6% 0.2% -0.4% 0.5% 1.4% -0.6% 0.3% 0.6% CT-0.03% RI0.1% 0.0% 0.3% 1.7% 1.1% DE1.0% NJ0.2% 0.1% 0.9% 0.3% 1.3% 0.4% 1.3% 1.0% 0.3% -0.1% MD 0.3% DC 1.0% -0.2% 1.5% AK -0.3% • Source: U.S. Census Bureau HI-0.3%

17. State construction employment change (U.S.: 4.6%) 1/18 to 1/19: 44 states up, 6 states and DC down Over -10% -5.1% to -10% -0.1% to -5% 0% 0.1% to 5% 5.1% to 10% Over 10% NH4% 7% 7% VT -5% 7% -1% -4% 7% 2% 4% MA1% 4% 4% 4% 9% CT11% RI5% 3% 13% 3% 1% 3% 2% DE8% NJ4% 3% 3% 7% 3% 52% 1% 2% MD 1% 4% 3% 10% 4% 2% 5% 7% 3% 2% -4% 7% 6% -2% DC -1% 5% -1% Shading based on unrounded numbers 5% HI1% • Source: BLS state and regional employment report

18. North Carolina construction employment1/90–2/19 (seasonally adjusted; shading = recessions) Peak: Mar ‘07 256,400 2/18–2/19 North Carolina 2.8% 223,000 13% below peak Source: BLS

19. Construction Employment Change from Year Ago1/08–2/19 (not seasonally adjusted) 2/18–2/19: U.S. 3.2% North Carolina 3.2% Charlotte-Concord-Gastonia, NC-SC* -1.3% *The Bureau of Labor Statistics reports employment for construction, mining and logging combined for metro areas in which mining and logging have few employers. Source: BLS

20. Change in construction employment, 2/18–2/19 (NSA) *The Bureau of Labor Statistics reports employment for construction, mining and logging combined for metro areas in which mining and logging have few employers. To allow comparisons between states and their metros, the table shows combined employment change for these metros. Not seasonally adjusted statewide data is shown for both construction-only and combined employment change. Source: AGC rankings, calculated from BLS state and area employment reports

21. Construction employment change by metro, 2/18–2/19 21 Over 10% 5.1% to 10% 0.1% to 5% 0% -0.1% to -5% -5.1% to -10% Over -10% Shading based on unrounded numbers Source: BLS state and regional employment report

22. Construction workforce indicators (not seasonally adjusted) Construction job openings rate has been growing as pay accelerates (Jan. data, 2009-19) Construction openings: all-time high; hires steady (Jan. data, 2009-19) Source: Bureau of Labor Statistics

23. Outlook 2019: Firms plan to add workers but expect continued difficulty finding them Source: AGC 2019 Outlook Survey, Jan. 2019

24. Outlook 2019: Firms with staffing challenges face higher costs and delays Source: AGC 2019 Outlook Survey, Jan. 2019

25. 12-month change in producer price index for key inputs Source: Bureau of Labor Statistics

26. Cumulative changes in materials & labor costs vs. bid prices​ Cumulative % change, not seasonally adjusted 1/16–2/19 PPI for inputs to construction Average hourly earnings for all construction employees PPI for nonresidential building Source: Bureau of Labor Statistics

27. 2017-2018 summary and 2019 forecast

28. AGC economic resources(email simonsonk@agc.org) • The Data DIGest: weekly 1-page email (subscribe at http://store.agc.org) • monthly press releases: spending; producer price indexes; national, state, metro employment with rankings • yearly employment & outlook surveys, state and metro data, fact sheets: www.agc.org/learn/construction-data • webinar May 16 11-12:30 PDT w/ Kermit Baker, AIA, & Alex Carrick, ConstructConnect